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18 martie, 2019

The tax on bank assets, called the „tax on greed” by OUG 114 authors who imposed it, may reduce the economic growth by 0.6-1.1 percentage points, according to the impact study that Florin Georgescu, First Vice-governor of the National Bank of Romania (BNR), presented Friday to leaders of the ruling coalition.

The impact study reveals many other negative effects that require for the ordinance to be amended, among which, according to the information available, we noted the following:

  • an increase of costs in financing the state,
  • an increase in RON depreciation pressures,
  • a decrease in the volume of lending to population and companies,
  • a decline in stock market performance.

The study takes into account four scenarios of the economy’s response to the constraints imposed by OUG 114/2018, and the most likely effects under the baseline scenario in the case of a 1.2% tax on the total financial assets of banks are:

  • losses of RON 1.2 billion in the banking system in 2019 and 2020;
  • a decrease in solvency ratio of banks by approximately 2 percentage points (pp.), down to 17.9% in 2019 and by 1.2 percentage points in 2020, to 16.7%;
  • a deficit of capital for 7 banks, of which 2 systemic institutions in 2019 and 14 banks in 2020, of which 4 systemic banks;
  • capital increases needed for banks with deficits at this chapter would amount to RON 600 million in 2019 and RON 1,600 million in 2020;
  • a decline in the volume of lending by RON 6 billion in 2019 (of which 3.3 – loans granted to the real sector) and by RON 10.9 billion in 2020 (RON 5.9 billion for the real sector)
  • a decrease in the economic growth by 0.64 percentage points in 2019 and by 1.07 percentage points in 2020.

„Tax on greed” effects – in 4 scenarios

The BNR impact study takes into account various proportions of assets for the tax base and various asset types. Out of other details we noted:

Scenario 1: Tax on total assets

  • losses of RON 2 billion; 29 out of 35 credit institutions register a negative result;
  • the decline in the solvency ratio of banks registered in Romania (excluding foreign branches) from 20% (September 2018) to 17.9% by the end of 2019 and to 16.7% in December 2020.
  • capital increases needed for 14 credit institutions (including 4 systemic institutions), to reach an appropriate level of own funds at the end of 2020;
  • banks with no financial capacity for capital raise will take measures to reduce the lending so that to restore the capital adequacy ratio;
  • a decline in the economic growth by 0.6 pp. in 2019, respectively 1.1 pp. in 2020.

Scenario 2: a tax on only 75% of financial assets of banks controlled by foreign credit institutions

  • losses drop to RON 76 million lei;
  • solvency ratio decrease to 18.3% by the end of 2019, and to 17.3% in December 2020;
  • capital increases needed in 10 credit institutions (of which 2 institutions of systemic importance) of RON 440 million in 2019 and RON 1.12 billion in 2020 in order to ensure the adequacy of own funds;
  • a reduction of loans by up to RON 4.8 billion in 2019 (RON 2.7 billion for the real sector and the rest for the government sector and others), respectively RON 7.3 billion in 2020 (RON 3.9 billion for the real sector);
  • a deceleration in the economic growth by about 0.6 percentage points in 2019 and 0.9 percentage points in 2020;

Scenario 3: Scenario 2 and repealing exposure on public administration and of required minimum reserves

  • profits of RON 11 billion in the banking system; the number of banks with losses drops to 24 out of 35;
  • a solvency decline to 19% (December 2019) and 18.6% (December 2020) respectively;
  • capital increases needed of RON 200 million in 2019 in 7 banks (of which two systemic banks) and RON 600 million in 2020;
  • the decrease in lending by up to RON 2.6 billion in 2019 (RON 1.5 billion for the real sector) and RON 3.6 billion in 2020 (RON 1.7 billion for the real sector);
  • a decline in the economic growth by 0.6 pp. in 2019 and 0.8 pp. in 2020.

Scenario 4: Scenario 3 and removal of performing credits granted to businesses from the asset base

  • overall profit on the banking system of RON 2 billion, but 21 out of 35 banks still register losses;
  • a solvency decline to 19.4% (December 2019) and to 19.2% (December 2020);
  • capital increases of RON 200 million needed by 6 credit institutions (of which one systemic bank) in 2019, and RON 400 million in 2020
  • a decline in lending by up to RON 2.0 billion in 2019 (RON 1.2 billion to the real sector), RON 2.5 billion in 2020 (RON 1.2 billion to the real sector).
  • A decrease in the economic growth by 0.6 percentage points in 2019 and by 0.8 percentage points in 2020 respectively

The effects of the tax would be transferred to the interest rate, under the hypothesis that financial institutions would try to recover the equivalent value of the amounts transferred to the state budget in the form of the „tax on bank assets”.

Other shocks

Simulations for the impact study include a version with one percentage point increase in the spread between active and passive interest rates that banks use.

According to the BNR study:

  • Public administration costs for financing current flows and refinancing domestic public debt would increase, which is estimated under an expected contraction in the banks’ exposure needed for returning to sustainable levels of the solvency ratio (affected by the quarterly payment of the asset tax).
  • The amount of primary budget deficits (those relevant from the perspective of determining the fiscal impulse from the economy) is estimated at lower levels, which results in a decrease in discretionary fiscal stimuli, with an adverse impact on the economic activity.
  • OUG 114/2018 measures have a supposedly negative effect on the companies’ confidence and they reduce their investment activity also because of the increasing difficulty in accessing alternative financing sources (i.e. the capital market).
  • In this respect, one of the channels focused on the impact of the significant decline in the BET index on real GDP growth, mediated by a decrease in the investment activity (assumed a reduction in the quarterly dynamics of GFCF (gross fixed capital formation – investments, editor’s note) by 1.2 percentage points in Q1 2019, which represents a -0.3 percentage point effect on real GDP in the quarter mentioned).
  • In addition, this investment decline has allegedly persistent and medium-term effects on potential GDP growth. The limitation of investment has serious negative effects on profitability, especially for companies in the banking, telecoms and electricity and gas sectors.
  • Moreover, the unexpected character of these measures approved by OUG 114/2018 affected the perception of investors’ sovereign risk, which resulted in an increase in the risk premium (including in the regional context) and put depreciation pressures on RON.
  • Information about the existence of this document ware published for the first time by PNL Senator Florin Catu, in a Facebook post.
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